Financial barriers to cross-border energy

Projects to connect energy grids across national borders are all very well in theory, but in practice they are not happening – held back by a lack of money or a lack of permits: planning permission, health and safety authorisations and the like.

The European Commission estimates that an investment of more than €200 billon is needed between now and 2020 in cross-border energy interconnector projects, made up of €140bn for high voltage electricity lines, €70bn for gas pipelines and €2.5bn for the infrastructure to transport carbon dioxide after producing energy from carbon capture and storage. The Commission’s own best guess is that half of these projects will not materialise because permit procedures can take up to ten years and because the business case for cross-border projects is not strong enough.

To improve the likelihood of getting projects completed, the Commission is proposing new rules for such ‘projects of common interest’. It wants to limit the duration of permission procedures to three years and to improve the incentives for investors.

The Commission’s legislative proposals (now being considered by the European Parliament and the Council of Ministers) envisage that the European associations of transmission system operators (ENTSO-E for electricity and ENTSO-G for gas) should agree on a standardised cost-benefit calculation for such cross-border projects. Network regulators would allocate costs across borders and would be asked to adjust tariffs so that investors and operators would still have an incentive when projects are riskier than usual, for example because they involve new transmission technologies or complex co-ordination.

Spending plans

The Commission is also proposing, as part of the EU’s spending plans for the 2014-20 period, a €50bn initiative to fund energy, transport and broadband infrastructure – the Connecting Europe Facility (CEF). Of that, it proposes to set aside €9.1bn for energy. Mark Johnston from WWF thinks the CEF has a good chance of being approved by MEPs and national governments because it is a package that offers something for everyone.

The scale of the CEF is much greater than what it replaces, the energy elements of the Trans-European networks (TEN-E). But it is not enough on its own to plug the €100bn gap in investment in energy infrastructure that the Commission forecasts.

So €1bn of the new facility is earmarked for investment in “innovative financial instruments”, to leverage private investment in projects that are commercially viable. Companies are struggling to raise the money on the bond market as they used to by selling their debt. The Commission proposes project bonds instead: a guarantee or loan from the European Investment Bank backed up in turn by the €1bn from the EU budget. The idea is to attract long-term investors such as pension funds rather than to rely on banks.

MEPs support the idea, but the responses from member states have been mixed. Smaller countries, for example, fear they might never have a project big enough to benefit – project bonds would make sense only for projects worth at least €150 million.

So now the EU has a concept of how to put the theoretical benefits of cross-border interconnectors into practice and make good a shortfall of €100bn: a faster, simpler process for permissions (€50bn); project bonds and other innovative financing (€20bn); grants leveraged with the CEF and improved incentives through changes to tariffs. But MEPs and national governments have yet to approve the plan.